The Law of Demand - The Foundational Concept of Our Behavior

Here’s a classic concept for you…

This week’s “Just One Thing” is a look at the iconic law of demand. For those of you who have purchased the Microeconomics Course, this may be familiar to you.

The law of demand is one of the foundational principles of economics, and it’s surprisingly simple, yet incredibly powerful.

Before we dive into it, though, we need to define demand itself. Demand refers to the quantity of a good or service that consumers are willing and able to purchase at a given price in a given period of time.

Each part of that definition is essential: quantity, willingness, ability, price, and time. Together, they describe effective demand, which is typically expressed as a downward-sloping demand curve on a graph.

The Law of Demand

The law of demand is the idea that there is an inverse relationship between the price of a good and the quantity demanded by consumers—all else held equal (or, in Latin, ceteris paribus).

Simply put, when the price of a good decreases, the quantity demanded increases. Conversely, when the price goes up, the quantity demanded decreases. This relationship is visualized on a demand curve, where price is on the vertical axis and quantity is on the horizontal axis.

Think of the demand curve as a collection of data points, each representing the quantity of a product that consumers would buy at various price levels.

For example, if the price of gasoline is $10 per liter, fewer people will buy it compared to when it is $2 per liter. The downward slope of the demand curve reflects this predictable behavior.

Why Does the Law of Demand Work?

The law of demand is driven by two key effects: the income effect and the substitution effect.

  1. The Income Effect
     When the price of a product falls, consumers experience an increase in their "real income" or purchasing power. Essentially, their money stretches further, allowing them to buy more of the product without increasing their total spending. For instance, if you earn $100 a month and a product drops in price from $50 to $10, it becomes a much smaller portion of your budget, making it more accessible.
  2. The Substitution Effect
     As a product’s price falls, it becomes relatively more attractive compared to similar products whose prices remain unchanged. This encourages consumers to substitute the now cheaper product for others they might have purchased before. Imagine you’re shopping for running shoes and notice that Adidas shoes are consistently $10 cheaper than Nike. If both brands are equally appealing to you, you’ll likely choose Adidas due to the lower price.


These two effects combine to explain why demand increases as prices drop, reinforcing the inverse relationship described by the law of demand.

Movements Along the Demand Curve

It’s important to note that when the price of a product changes, it causes a movement along the demand curve. For instance, if gasoline prices decrease, more consumers will buy it, resulting in movement along the curve. However, changes in other factors—like income levels, preferences, or the price of substitutes—can shift the entire demand curve, a topic covered in the determinants of demand.

Why it Matters

Understanding the law of demand gives you a window into consumer behavior. It’s intuitive because it reflects what we do in our everyday lives—buy more when prices drop and scale back when prices rise.

This principle is fundamental to all of economics, and as you continue building on it, you’ll see how it ties into broader concepts like market equilibrium and the dynamics between demanders and suppliers.